With benchmark interest rates at all-time lows, the FTSE having passed pre-crisis highs in 2015 and facing occasional wobbles, many professionals are asking themselves where to invest, and especially, whether they should consider trying their hand at property investment or expanding an existing UK investment property portfolio.
UK investment property, as an asset class, is potentially very attractive: it provides an inflation hedge with lower volatility than equities, and allows investors to hedge their own exposure to increasing real-estate prices. The UK in particular is a unique market for residential property investment because of the various factors that support its housing prices:
- Growing population, which increased by 4 million over the past decade to 63 million
- High population density – over 4x that of France
- Chronic housing shortages caused by limitations on property development and building heights
- Political, legal and economic stability
Indeed, according to The Economist, the UK has faced the highest house price increases over the past 30 years among major economies. 2015 prices are nearly 7.5 times what they were in 1985, as compared to around 6 times in runner-up Sweden, 5 times in booming China and 3 times in the US. In addition to this, the UK had one of the fastest recoveries in house prices from the 2008 slump, having almost fully rebounded by 2010. This is positive for the buy to let market.
Below we provide an overview of the largest UK investment property markets and answers to frequently asked questions. If you would like to learn more about how the UK buy-to-let market works, or would like to sign up for one of one of our upcoming property seminars, please join our next seminar.
UK investment property – Where shall I invest in buy to let?
Different regions of the UK offer different opportunities and risks. Traditionally many investors have focused on the London market. But with other regions seeing increasing investment and demand, and with London prices at all-time highs, there are growing reasons to consider alternatives to the capital.
London has seen massive increases in house prices since the financial crisis. For over 5 years, London prices have outpaced the national average by 5 to 10 percentage points each year. In fact, over the past year, prices rose around 10% in London, over double the nationwide average of 4%. Average London property is around GBP 500,000 – above pre-crisis peaks. Even adjusting for incomes, prices look high: they exceed 20 times yearly income in certain areas, over twice the national average.
On the other hand, with nearly 10 million people – more than all of the South East put together – London is a large, prime and liquid property market that even attracts international investors, who are much less likely to invest in smaller cities. This provides an alternative source of demand for UK investment property. Also, price increases are partly driven by factors that show no indication of changing: young professionals choosing an urban rather than commuter life, but facing limited property development.
With London prices soaring beyond the reach of many of those who work there, some have chosen to settle in the South East – the commuter belt that spans areas up to an hour from London by train or car and that also includes towns such as Oxford, St Albans, Guldford, Southend on Sea & Reading, which also have their own universities and businesses driving demand, and which houses around 9 million people.
This has caused prices in the South East to rise in tandem with those in London, and as of 2016 some analysts forecast that prices in London will soon top-out, whereas those in the South East should continue rising for several years to come, making this an attractive region in which to invest. Prices in the South East have been rising in tandem with London.
As the second largest urban area in the UK, with 2.6 million residents, there are significant reasons to look closely at property development and investment opportunities in so-called ‘London of the North’. With an influx of new companies, including the migration of major BBC radio networks, adding to the growing vibrancy of the city, Manchester is a city with clear ambition for growth. Inner city investment has already occurred with a number of multi-million pound commercial and residential property development projects underway.
Prices have been rising at a steady pace in line with UK averages, and with average prices below £150,000, just below pre-crisis peaks, according to Hometrack, it is a market that offers relatively accessible investments for those who believe the rise of the urban lifestyle is here to stay.
With 2.5 million residents in the surrounding counties and over 1 million in the City itself, Birmingham rivals Manchester as the UK’s second largest city. While economic growth in Birmingham flagged for many years, some say the city is in the midst of a renaissance, with major investment in city infrastructure and in property developments in the city centre. Major companies such as HSBC & Deutche Bank have moved service centers there, and with its central position and excellent transport links, the city may be poised to grow as a service and logistics hub.
At an hour and a half by train from London, it is also not inconceivable that if prices keep rising in London and the Southeast, Birmingham may become attractive to commuters, especially given that home prices are reasonably accessible – averaging less than £140,000. Birmingham has seen a 14% increase in buy to let purchases in 2015.
With 2.2 million residents in the surrounding counties and over 700 thousand in the city itself, Leeds is the UK’s fourth largest urban area. The Leeds housing market has performed similarly to Manchester – average prices are below £150,000 and a little under pre-crisis peaks, having risen in line with UK averages, and as in the case of Manchester, it offers access to urban real-estate at moderate entry prices.
Despite a relatively modest population of 1.4 million in its metro area, Edinburgh’s economy punches above its weight, thanks to its position as capital of Scotland and strong financial and insurance sector, resulting in GDP per capita that rivals that of London. Average house prices are close to £200,000 according to Hometrack. The city was hit particularly hard during the financial crisis, but as of 2015 prices are close to pre-crisis peaks.
As the largest city in Scotland, with a population of 1.8 million in its metro area, Glasgow is a natural market to consider. With one of the highest GDPs per capita and at the same time one of the lowest house price levels (averaging £110,000) of the large cities of the UK, Glasgow property may be a bargain, and although house prices took much longer to recover from the financial crisis than in other cities, over the past year they have accelerated substantially and as of 2015 are outpacing cities such as Manchester and Birmingham.
Despite a modest population of around 600,000, Bristol’s housing market has been booming: average prices are around £240,000 according to Hometrack, 45% above the depths of the financial crisis and 17% above pre-crisis peaks – a pace of growth that behind only those of London, Oxford and Cambridge. With a strong economy driven by creative industries, tourism and aerospace, a large indoor arena planned for opening in 2017 and a high-speed rail connection to London planned for 2018, the Bristol buy to let market is likely to have strong momentum.